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Thursday, November 3, 2016

The history of technological progress is sometimes told as "nothing much worth mentioning until the Industrial Revolution." But writing in the years before 1776, Adam Smith would not have agreed. Although his example of the division of labor in the pin-making industry near the start of The Wealth of Nations gets more attention, and deservedly so, near the end of Book I of TWN there is also some discussion of of technological progress. In particular, Smith makes a strong claim that the real price of watches may have fallen by 95% during the previous century. In the November 2016 Quarterly Journal of Economics, Morgan Kelly and Cormac Ó Gráda build up data on the price of watches from 1685 to 1810 by using the reported value of stolen watches in criminal trials the Old Bailey in London during this time. Here, I'll first review Smith's comments, and then offer a brief overivew of the Kelly and Ó Gráda essay, "Adam Smith, Watch Prices, and the Industrial Revolution," (131: 4, pp. 1727-1752). The QJE is not freely available online, but many readers will have access through library subscriptions.

The relevant discussion from Adam Smith occurs at the tail end of Book 1, in Part III of Chapter 11. Here, I'll quote from the ever-useful version of The Wealth of Nations available online at Library of Economics and Liberty website. Smith doesn't use the modern terminology of "productivity" or "technology," but phrases his argument in terms of "the natural effect of improvement." He writes (paragraph 240 and following):

It is the natural effect of improvement, however, to diminish gradually the real price of almost all manufactures. That of the manufacturing workmanship diminishes, perhaps, in all of them without exception. In consequence of better machinery, of greater dexterity, and of a more proper division and distribution of work, all of which are the natural effects of improvement, a much smaller quantity of labour becomes requisite for executing any particular piece of work; and though, in consequence of the flourishing circumstances of the society, the real price of labour should rise very considerably, yet the great diminution of the quantity [of labor] will generally much more than compensate the greatest rise which can happen in the price. ...

This diminution of price has, in the course of the present and preceding century, been most remarkable in those manufactures of which the materials are the coarser metals. A better movement of a watch, than about the middle of the last century could have been bought for twenty pounds, may now perhaps be had for twenty shillings. In the work of cutlers and locksmiths, in all the toys which are made of the coarser metals, and in all those goods which are commonly known by the name of Birmingham and Sheffield ware, there has been, during the same period, a very great reduction of price, though not altogether so great as in watch-work. It has, however, been sufficient to astonish the workmen of every other part of Europe, who in many cases acknowledge that they can produce no work of equal goodness for double, or even for triple the price. There are perhaps no manufactures in which the division of labour can be carried further, or in which the machinery employed admits of a greater variety of improvements, than those of which the materials are the coarser metals. ...

Both in the coarse and in the fine woollen manufacture, the machinery employed was much more imperfect in those ancient, than it is in the present times. It has since received three very capital improvements, besides, probably, many smaller ones of which it may be difficult to ascertain either the number or the importance. The three capital improvements are: first, The exchange of the rock and spindle for the spinning-wheel, which, with the same quantity of labour, will perform more than double the quantity of work. Secondly, the use of several very ingenious machines which facilitate and abridge in a still greater proportion the winding of the worsted and woollen yarn, or the proper arrangement of the warp and woof before they are put into the loom; an operation which, previous to the invention of those machines, must have been extremely tedious and troublesome. Thirdly, The employment of the fulling mill for thickening the cloth, instead of treading it in water. Neither wind nor water mills of any kind were known in England so early as the beginning of the sixteenth century, nor, so far as I know, in any other part of Europe north of the Alps. They have been introduced into Italy some time before.

The consideration of these circumstances may, perhaps, in some measure explain to us why the real price both of the coarse and of the fine manufacture, was so much higher in those ancient, than it is in the present times.

Was Adam Smith correct in his claim that about a dramatic fall in the price of watches due to improved productivity during the century before the Industrial Revolution took off? Kelly and Ó Gráda write (footnotes omitted):

"Most recent studies of the Industrial Revolution focus on the sustained innovations in the three sectors of textile spinning, iron making, and steam power that began in Britain in the latter half of the eighteenth century. To one usually well-informed contemporary observer, things appeared quite different. Discussing technological progress in The Wealth of Nations Adam Smith (1976, p. 270) ignores most of the famous inventions in these sectors, and instead chooses a paradigm of technical progress one good that is entirely absent from most current histories of the Industrial Revolution: watches. In fact, Smith makes the notable claim that the price of watches may have fallen by up to 95% over the preceding century, a claim we attempt to evaluate here.

"To test whether watch prices had been falling steadily and steeply since the late seventeenth century, we use the records of more than 3,200 criminal trials at the Old Bailey court in London from 1685 to 1810. Owners of stolen goods gave the value of the items they had lost. Because watches were frequently stolen, we can reliably track how their value changed through time. Contemporaries divided watches into two categories: utilitarian silver or metal watches and more expensive gold ones. After adjusting for inflation, the price of each type of watch falls steadily by 1.3% a year, equivalent to a fall of 75% over a century. If we assume modest rises in the quality in silver watches, so that a watch at the 75th percentile in the 1710s was equivalent to one of median quality in the 1770s, we find an annual fall in real prices of 2% or 87% over a century, not far from what Smith suggests.

"Most of the cost of a silver watch mechanism was the labor involved in cutting, filing, and assembling the parts, so assuming a constant markup (which is probably valid given the small scale of individual producers and the absence of foreign import penetration before 1815) we can gauge the rise of labor productivity in watchmaking by comparing how the price of a watch fell relative to nominal wages. During the period 1680–1810, real wages were roughly constant, so this rise in labor productivity is similar to the fall in real prices of watches."

There is a lively body of economic research looking at economic history in the centuries before 1800, with a focus on processes of growth and change during that time. Finding data to test Smith's watch-making example is a vivid illustration. But those looking for bigger-picture discussions of economic movements might also check out these papers from the Journal of Economic Perspectives:

"[W]e argue that Europe’s rise to riches during the First Divergence in this paper, we argue that Europe’s rise to riches during the First Divergence was driven by the nature of its politics after 1350—it was a highly fragmented continent characterized by constant warfare and major religious strife. Our explanation emphasizes two crucial and inescapable consequences of political rivalry: war and death. No other continent in recorded history fought so frequently, for such nd death. No other continent in recorded history fought so frequently, for such long periods, killing such a high proportion of its population. When it comes to destroying human life, the atomic bomb and machine guns may be highly efficient, but nothing rivaled the impact of early modern Europe’s armies spreading hunger ut nothing rivaled the impact of early modern Europe’s armies spreading hunger and disease. ...

War therefore helped Europe’s
precocious rise to riches because the survivors had more land per head available
for cultivation. We argue that the feedback loop from higher incomes to more war
and higher land-labor ratios was set in motion by the Black Death in the middle
of the 14th century. As surplus incomes over and above subsistence increased, tax
revenues surged. These in turn financed near-constant wars on an unprecedented scale. Wars raised mortality not primarily because of fi cale. Wars raised mortality not primarily because of fighting itself; instead, armies
crossing the continent spread deadly diseases such as the plague, typhus, or small pox. The massive, continued destruction of human life that followed led to reduced
population pressure. In our view, it was a prime determinant of Europe’s unusually
high per capita incomes before the Industrial Revolution."

"The new data shows trends in GDP per capita in the key European economies before the Industrial Revolution, identifying episodes of economic growth in specific countries, often lasting for decades. Ultimately, these periods of growth were not sustained, but they noticeably raised GDP per capita. It also shows that many of these economies experienced periods of substantial economic decline. Thus, rather than being stagnant, pre-nineteenth century European economies experienced a great deal of change."